{
  "id": 4736353,
  "name": "IN THE MATTER OF: THE APPEAL OF COLONIAL PIPELINE, a public service company engaged in business in North Carolina, from the valuation of its property by the North Carolina Property Tax Commission for 1981",
  "name_abbreviation": "In re the Appeal of Colonial Pipeline",
  "decision_date": "1986-08-29",
  "docket_number": "No. 225PA84",
  "first_page": "224",
  "last_page": "237",
  "citations": [
    {
      "type": "official",
      "cite": "318 N.C. 224"
    }
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  "court": {
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    "id": 9292,
    "name": "Supreme Court of North Carolina"
  },
  "jurisdiction": {
    "id": 5,
    "name_long": "North Carolina",
    "name": "N.C."
  },
  "cites_to": [
    {
      "cite": "313 S.E. 2d 819",
      "category": "reporters:state_regional",
      "reporter": "S.E.2d",
      "year": 1984,
      "opinion_index": -1
    },
    {
      "cite": "67 N.C. App. 388",
      "category": "reporters:state",
      "reporter": "N.C. App.",
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      "year": 1984,
      "opinion_index": -1,
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    {
      "cite": "313 N.C. 117",
      "category": "reporters:state",
      "reporter": "N.C.",
      "opinion_index": 0
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    {
      "cite": "328 S.E. 2d 235",
      "category": "reporters:state_regional",
      "reporter": "S.E.2d",
      "weight": 6,
      "year": 1985,
      "pin_cites": [
        {
          "page": "246",
          "parenthetical": "footnote omitted"
        },
        {
          "page": "239"
        }
      ],
      "opinion_index": 0
    },
    {
      "cite": "313 N.C. 177",
      "category": "reporters:state",
      "reporter": "N.C.",
      "case_ids": [
        4724189
      ],
      "weight": 4,
      "year": 1985,
      "pin_cites": [
        {
          "page": "194-95"
        }
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      "case_paths": [
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  "last_updated": "2023-07-14T18:03:08.889643+00:00",
  "provenance": {
    "date_added": "2019-08-29",
    "source": "Harvard",
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  "casebody": {
    "judges": [],
    "parties": [
      "IN THE MATTER OF: THE APPEAL OF COLONIAL PIPELINE, a public service company engaged in business in North Carolina, from the valuation of its property by the North Carolina Property Tax Commission for 1981"
    ],
    "opinions": [
      {
        "text": "EXUM, Justice.\nThis is an ad valorem tax case in which the petitioner, Colonial Pipeline Company, hereinafter \u201cColonial,\u201d contends that the North Carolina Department of Revenue, \u201cDepartment,\u201d first, and then the Property Tax Commission, \u201cCommission,\u201d overvalued Colonial\u2019s system property for ad valorem tax purposes. Colonial contends further that the Court of Appeals erred in affirming the Commission\u2019s decision on valuation. Specifically, Colonial contends that it was error for the Court of Appeals to affirm the taxing authorities: (1) use of imbedded book cost of debt, rather than market cost, in arriving at a capitalization rate in the income approach to valuation; (2) inclusion of certain investment tax credits in the stream of income to be capitalized under the income approach to value; (3) refusal to reduce Colonial\u2019s system property values as reported to the Federal Energy Regulatory Commission, \u201cFERC,\u201d under the cost approach to value because of intervening \u201ceconomic obsolescence.\u201d Largely on the basis of our decision in In re Southern Railway, 313 N.C. 177, 328 S.E. 2d 235 (1985), we conclude the Court of Appeals erred as to points one and two. We conclude the Court of Appeals correctly determined point three. We, therefore, reverse in part and affirm in part the Court of Appeals\u2019 decision.\nI.\nPursuant to subchapter II of chapter 105 of our General Statutes, hereinafter \u201cMachinery Act\u201d or \u201cAct,\u201d the Department valued Colonial\u2019s system property (Colonial being a \u201cpublic service company\u201d subject to ad valorem taxation under \u00a7 333(14)) at $1,216 billion. The Department allocated $160 million to North Carolina. \u00a7\u00a7 337, 338. Colonial appealed to the Property Tax Commission.\nAt the hearing before the Commission, the principal witnesses were Robert H. McSwain, for Colonial, and William R. Under-hill, for the Department. McSwain is a Member of the Appraisal Institute, the professional designation of the American Institute of Real Estate Appraisers; a Senior Real Property Appraiser, the professional designation of the Society of Real Estate Appraisers; and a Certified Assessment Evaluator, the professional designation of the International Association of Assessing Officers. He teaches railroad and public utility valuation at the college level and has held various memberships and offices in professional organizations. Underhill is employed by the North Carolina Department of Revenue and is an experienced appraiser of public service companies. He is a member of several professional associations. Both witnesses were qualified as experts in the field of utility appraisal.\nThe Machinery Act requires that public service companies, such as Colonial, be appraised for ad valorem tax purposes by determining the \u201ctrue value\u201d of the company\u2019s \u201csystem property used . . . both inside and outside this State.\u201d \u00a7 335(b)(1). \u201cSystem property\u201d is that property used in the company\u2019s public service activities and any property under construction \u201cwhich when completed will be used\u201d in the company\u2019s public service activities. \u00a7 333(17). True value means \u201cmarket value, that is, the price estimated in terms of money at which the property would change hands between a willing and financially able buyer and a willing seller, neither being under any compulsion to buy or to sell ....\u201d\u00a7 283. The public service company\u2019s entire system property, without geographical or functional division, is appraised and a portion of the appraised value is allocated to North Carolina by various statutory formulae. \u00a7 337. See generally, In re Southern Railway, 313 N.C. 177, 328 S.E. 2d 235.\nBoth McSwain and Underhill used three methods of appraisal, prescribed by \u00a7 336, commonly referred to as (1) the income approach, (2) the stock and debt approach, and (3) the cost approach. The income approach to value is based on the principle that something is worth what it will earn. Under this approach fair market value is determined by capitalizing at a specified rate of return future income which the appraiser believes can reasonably be earned on the company\u2019s system property. The formula is: value equals income divided by rate. The rate is that rate of return that would be required by a reasonably prudent investor in order to induce the investor to commit capital to the purchase of the property generating the income. The stock and debt approach to value relies simply on a market valuation of the company\u2019s outstanding stock and debt. \u00a7 336(a)(1). This approach is based on the theory that the value of the company\u2019s assets on the left side of the balance sheet should equal the value of its outstanding liabilities and capital on the right side of the balance sheet. The values arrived at in this manner must be adjusted so as to remove the influence of any non-system, non-taxable property. The cost approach starts with the book value of all the company\u2019s system property as shown on the books kept by the appropriate state or federal regulatory agencies. Consideration is then given to the replacement or reproduction costs of this property \u201cless a reasonable allowance for depreciation.\u201d \u00a7 336(a)(2).\nBoth McSwain and Underhill relied essentially on the same basic facts, business operations and accounting data, in making their appraisals. It is undisputed that Colonial is the nation\u2019s largest volume petroleum products pipeline. It delivers refined petroleum products through more than 5,000 miles of pipeline extending from refineries near Houston, Texas to the New York harbor area. Most of the pipeline was built between 1961 and 1978. Colonial\u2019s last major construction program ended in 1980, and the company had no major construction plans or programs in effect on 1 January 1981, the date of the valuation of its property. Colonial is a common carrier regulated by FERC. Its stock is owned by ten other corporations, all of which are members of the petroleum industry. As a common carrier Colonial\u2019s transportation service must be offered on a non-discriminatory basis, and preferential treatment cannot be given to its stockholders. Colonial has a capital structure of 94% debt, almost all of which is long-term, and 6% equity. Its long-term debt is guaranteed by its stockholders and cannot be assumed by a purchaser of Colonial\u2019s assets. FERC authorizes Colonial to earn on an average not more than a 10% rate of return on its FERC valuation. Unlike other utilities, this rate of return is not determined by Colonial\u2019s overall cost of capital and is not influenced by either its capital structure or the capital cost of the components of that capital structure.\nMcSwain appraised Colonial\u2019s system property at $970,000,000. This was based upon an income indicator of value of $965,000,000, a stock and debt indicator of $939,400,000, and a cost indicator of $972,000,000. Underhill\u2019s appraisal of Colonial\u2019s system value was $1,216,000,000. It was based upon an income indicator of value of $1,186,941,543, a stock and debt indicator of $1,052,739,985, and a cost indicator of $1,279,568,881.\nIn their income approach to value McSwain and Underhill disagreed as to the amount of the future income stream to be capitalized and as to the weighted capitalization rate to be applied. McSwain capitalized projected net operating income of $135,000,000 at 14\u00b0/o. Underhill capitalized a projected net operating income of $131,187,600 at 11.2% and added to the result $15,623,543 for construction work in progress.\nThe difference in the projected future net income to be capitalized given by the two appraisers was primarily due to the difference in treatment of certain investment tax credits previously claimed by Colonial. For the years 1976 through 1980 Colonial had an average investment tax credit per year of $12,882,800. Under-hill included this amount in his projected future net income; McSwain did not.\nBoth Underhill and McSwain agreed that in determining the capitalization rate an appraiser should assume that a prudent investor would commit both debt and equity capital to the purchase of Colonial\u2019s system property at a ratio of 55% debt and 45% equity. McSwain used a capitalization rate of 14% based on a 16% return on equity weighted at .45 and market rate of return for debt of 12.5% weighted at .55. Underhill, on the other hand, used a capitalization rate of 11.2%. He weighted a 15% rate of return on equity at .45 and an 8% return for debt, equivalent to Colonial\u2019s imbedded debt cost, at .55. Underhill admitted that the market cost of debt on 1 January 1981 was 12%. Had he used a 12% market rate for debt, rather than the 8% rate based on Colonial\u2019s imbedded debt cost, Underhill\u2019s income indicator of value would have been $998,302,351, $188,639,192 less than his income indicator in which he used Colonial\u2019s imbedded debt cost and very close to McSwain\u2019s income indicator.\nBoth Underhill and McSwain used similar procedures under the stock and debt approach to value. Both agreed on the value to be ascribed to Colonial\u2019s debt. In order to arrive at the value of the capital stock, the stock not being traded on the market, both appraisers capitalized income available to the equity component of Colonial by the market rate of return demanded by investors for similar investments. The difference between their approaches using this method of valuation, which forms the basis for one of Colonial\u2019s complaints, is that Underhill, again, included in the projected future stream of income to be capitalized, projected investment tax credits, based on the annual average of credits taken by Colonial in the past. McSwain did not include such credits in his projection of Colonial\u2019s future income.\nIn the cost approach to value the only significant difference between the appraisers\u2019 calculations was in their treatment of \u201ceconomic obsolescence.\u201d Both appraisers relied on FERC valuations of Colonial\u2019s assets. Underhill adjusted this valuation for working capital, a 6% going concern value and construction work in progress to arrive at a cost indicator value of $1,279,568,881. McSwain arrived at an adjusted FERC valuation of $1,292,322,222, which he reduced by 25.36% to $971,716,313 to allow for \u201ceconomic obsolescence.\u201d McSwain arrived at the 25.36% reduction on these grounds: Investors were demanding a minimum rate of return in the market of 14% for investments similar to Colonial. Because of FERC\u2019s ceiling on Colonial\u2019s rate of return, Colonial could only earn in 1981 10.45% on its adjusted FERC valuation. The difference between what Colonial could earn and what investors were demanding was 3.55 percentage points. This deficiency amounted to 25.36% of the 14% market rate of return. In McSwain\u2019s opinion because investors could not earn what the market demanded by investing in Colonial, the value of Colonial\u2019s system property should be reduced accordingly for what he called \u201ceconomic obsolescence.\u201d\nWith this evidence before it, the Commission adopted Under-hill\u2019s appraisal, thus approving Underhill\u2019s use of the imbedded cost of debt to arrive at an appropriate capitalization rate, his inclusion in the projected future income stream to be capitalized projected investment tax credits, and his refusal to reduce FERC\u2019s valuation under the cost approach for economic obsolescence.\nII.\nApplying the whole record test for appellate review as is required and as we did in Southern Railway, we conclude the Commission erred on this record in approving the Department\u2019s use of Colonial\u2019s imbedded, historical cost of debt rather than current market cost in arriving at a proper capitalization rate under the income approach to value. On a record similar to that now before us we held in Southern Railway that the Department was not justified in using imbedded cost of debt to arrive at an appropriate capitalization rate in the income approach to value for ad valorem tax appraisal purposes. Southern Railway controls this issue here.\nIndeed the record here is even less supportive of the use of imbedded debt cost than it was in Southern Railway. There the Department sought to justify use of imbedded debt on the grounds that the debt was assumable by a prospective purchaser. This is the ground upon which Underhill, the Department\u2019s witness, sought to justify use of the imbedded cost of debt in the instant case. He said, \u201cIt\u2019s my opinion under the willing-buyer-willing-seller concept, that the typical purchaser would buy the equity of a typical pipeline company and assume the debt at its existing rate. And this would assume also a typical capital structure.\u201d Yet even Mr. Underhill later testified that he understood Colonial\u2019s guaranteed debt could not be assumed by a purchaser. Consequently any purchaser would have to refinance the purchase at current market rates.\nThe Department argues that even if under Southern Railway it was improper to use imbedded cost of debt in arriving at a capitalization rate under the income approach to value, the error did not result in a substantially higher valuation than would have been reached under a proper method. This argument rests on a calculation made by the Commission under the income approach to value using a capitalization rate based on market rates rather than imbedded rates. The result comes close to the Department income indicator of value. We have carefully examined the Commission\u2019s calculation. The Commission used McSwain\u2019s income stream of $135,000,000. It used a cost of debt of 12% and a return to equity of 15%. It then, however, weighted the debt component at .936 and the equity component at .64, giving a weighted capitalization rate of 12.19%. Capitalizing $135,000,000 at 12.19% gives a value of $1,107,460,000, which is 93.3% of the Department\u2019s income indicator of $1,186,941,543. The Commission weighted the cost of debt and return to equity on the same ratio as exists in Colonial\u2019s actual capital structure. Yet both appraisers agree that in figuring a capitalization rate for use in the income approach to value, the ratio between cost of debt and return to equity should not reflect Colonial\u2019s actual capital structure but should reflect, instead, a more normal capital structure of 45% equity and 55% debt. The reason given is that this is the ratio at which a reasonably prudent buyer willing but under no compulsion to buy would likely commit capital. The record, therefore, does not support the Commission\u2019s weighting of the debt and capital components used in its calculation. This weighting looks only at value seen from the perspective of the owner-seller \u2014 an approach which we held was impermissible in Southern Railway under the willing seller-willing buyer approach to market value.\nIII.\nIt is also clear on this record that the Department and, ultimately, the Commission erred in including in Colonial\u2019s projected income stream a figure representing Colonial\u2019s average investment tax credits over the past five years. Both the Department and Colonial agree that an investment tax credit is a credit allowed against a taxpayer\u2019s federal income tax liability in an amount equal to 10% of the taxpayer\u2019s investment in certain depreciable property during the tax year. Existence of the credit is dependent upon the taxpayer\u2019s investment during the tax year. Once the credit is taken, it no longer exists. Colonial, therefore, will continue to have investment tax credits in the future equivalent to those it has enjoyed in the past only if it continues to invest in depreciable property at the same rate it has invested in the past and tax laws on this subject do not change. There is a stipulation in the record that Colonial\u2019s last major construction program ended in 1980 and \u201csince determination of this project in 1980, Colonial . . . has had no major construction plans or programs in effect.\u201d There is, therefore, no factual basis on this record for including in Colonial\u2019s projected future income stream amounts attributable to future investment tax credits, for there is no evidence to support the fact that there will be such credits in the future for Colonial.\nThe projected future income stream, moreover, must be based on what could reasonably be expected to be earned on Colonial\u2019s system property existing on the date of the appraisal adjusted for work in progress on that date. On Colonial\u2019s system property existing on the date of the appraisal, the evidence is that all investment tax credits have been taken. No future investment tax credits will be available.\nOn a record very similar to the one now before us, we held in Southern Railway that it was error for the Commission to include in projected future income to be capitalized deferred income tax expense. The Department sought to justify inclusion on the ground that the deferred taxes would never be paid. We said:\nThis testimony demonstrated, and the Department\u2019s witness did not contravene it, that in order for deferred income taxes to be perpetually immune from payment, the Railroads would have to maintain increasingly greater levels of investment necessary to obtain new depreciation in amounts sufficient to offset the reduced depreciation attributable to older assets. Further, the accelerated depreciation provisions of the income tax laws would have to r\u00e9main in place. Railroads\u2019 evidence demonstrated that potential buyers and sellers would not appraise the railroad system on the assumption that these kinds of investments would continue to be made, or that accelerated depreciation provisions would be forever with us. This is true notwithstanding the fact that Southern\u2019s capital acquisitions over the last several years have been so large that it has continued to accumulate deferral tax expenses and, in fact, has paid no income tax.\nIn re Southern Railway, 313 N.C. at 194-95, 328 S.E. 2d at 246 (footnote omitted).\nWe recognize the difference between investment tax credits and deferred income tax expense, the former being explained hereinabove and the latter in Southern Railway. Nevertheless, insofar as the inclusion of both in the income stream to be capitalized rests on the notion of continuing future capital expenditures and static tax laws, the decision in Southern Railway controls the point. Indeed, the record here is even less supportive of inclusion of investment tax credits in the income stream than the record in Southern Railway was of including deferred income tax expense. First, the derivation of investment tax credits and their relationship to the system property upon which the projected future income stream is in turn derived is clearer than in the case of deferred income tax expense. Second, it is clearer in this case that the investment tax credits attributable to the property to be appraised have in fact been exhausted and will not be available in the future than it was in Southern Railway that the deferred tax expense there attributable to the property being appraised would not in the future be available.\nThe Department attempts to justify inclusion of the investment tax credits in the income stream by noting that on 31 December 1980 Colonial\u2019s balance sheet showed construction work in progress in excess of $15,000,000. Underhill, however, adjusted his calculations based on income approach to value by adding $15,600,000 to his income indicator for construction work in progress. Indeed, this seems to be the proper way to account for construction work in progress in determining system property value under \u00a7 333(17) of the Machinery Act.\nIV.\nWe find no error, however, in the Commission\u2019s approval of the Department\u2019s refusal to deduct from the FERC valuations an amount attributable to \u201ceconomic obsolescence\u201d because FERC has limited Colonial\u2019s rate of return to a rate below the market rate. McSwain testified:\nEconomic obsolescence is a loss in value due to factors outside the property itself. In this case, because the property did not earn a market rate of return, in my opinion a purchaser would not pay the amount for the property reflected on line 13 [the FERC valuation of Colonial\u2019s property]. If he paid that amount for the property, he would receive, based on my projected income, a return of 10.45%.\nArlo Woolery, an expert real estate appraiser, testified for Colonial in support of McSwain\u2019s appraisals. He testified:\nI heard Mr. McSwain\u2019s testimony that this line 14 is obsolescence. As to whether he actually means to say economic obsolescence, I don\u2019t know whether it\u2019s economic or functional. I think that whenever you have loss in income, you can have a semantic argument about whether that loss is economic or functional obsolescence. In fact, now they\u2019ve even abandoned in some textbooks the term \u201ceconomic obsolescence\u201d, and they\u2019ve gone to what is called locational obsolescence. They are simply saying a thing becomes obsolescent by virtue of its location, and that allows the obsolescence factor to be applied to land, which is departure from the classical textbook theory that was popular years ago. I think you\u2019re going to be seeing that appear in appraisal textbooks more and more.\nI would not agree that we can just go ahead and mark off this line 14 and talk about land obsolescence; I\u2019m simply saying that it becomes immaterial what you call it, whether it be functional or economic. The fact remains that if a property does not earn the market rate of return, it has lost value. And if you\u2019re using cost as an indicator of value, you must make an adjustment for that loss in income to bring the value to a point where it will earn at the market market [sic] rate. I think Mr. McSwain is talking about economic obsolescence and perhaps some functional underlined on line 14.\nHe used the figure of 25.36 percent as reduction for obsolescence. I believe Mr. McSwain\u2019s testimony was that he reduced it by that amount becuase [sic] of a complicated formula that took into account the fact that Colonial is regulated by FERC and FERC allowed only a 10 percent return on the FERC valuation, and the market rate demand is 14.5 percent.\nAs to whether that entire calculation would be premised on the assumption that the equity investors of Colonial would be free to choose this type of investment and would weigh then whether he wanted to receive a 10 percent return on his money or 14.5 percent at the market rate, I don\u2019t think that either Mr. McSwain or I ever suggested that the investors were taking a 10 percent return on money. As I recall the McSwain appraisal, his overall rate of return was 14 percent. And what he was saying was that investors are looking for a 14 percent rate of return. The fact that FERC may allow 10.59, I believe, as a catch-up rate of return on its rate base \u2014 and there\u2019s a difference between tax base and rate base, as I\u2019m sure all you gentlemen know. That difference between the 14 percent investors are seeking in the marketplace and the 10.59 being earned on FERC rate base would represent a loss in value due to obsolescence however defined.\nWoolery had earlier explained \u201ceconomic obsolescence\u201d in terms of a reduction in the value of the property because of the erection nearby of an unsuitable improvement, for example, a slaughterhouse.\nUnderhill testified:\nIt\u2019s my opinion that in any regulated utility company that has a rate base as set by a regulatory agency, that . . . rate base is a reasonable indicator of market value standing alone. It doesn\u2019t mean that the final value will not reflect some obsolescence or value less than that figure. But I believe that in the cost approach that rate base figure is a reasonable indicator of market value and does not require an obsolescence adjustment. When I speak of rate base, by that I mean FERC valuation, and that is my reasoning for not applying an economic obsolescence factor.\nOn this state of the record, we conclude the Commission was justified in not adopting McSwain\u2019s view of the necessity of reducing the FERC valuations in the cost approach to value because of \u201ceconomic obsolescence\u201d attributable to the rate of return allowed by FERC on the rate base found by FERC. Colonial concedes that McSwain\u2019s \u201cdetermination of economic obsolescence is an opinion.\u201d This record demonstrates that deductions for \u201ceconomic obsolescence\u201d are indeed matters of appraisal judgment about which reasonable appraisers may differ. As such, the Commission was not required to adopt McSwain\u2019s view of the matter in the face of an equally plausible contrary opinion.\nIt is difficult, moreover, for us to discern how a rate of return set by a regulatory agency can ever be considered \u201ceconomic obsolescence.\u201d Presumably, the rate of return is a fair rate of return on the regulatory agency\u2019s determination of the utility\u2019s rate base. Further, prospective purchasers of Colonial\u2019s system property would not necessarily be bound by the rate of return set by FERC on this property as it exists in the hands of Colonial. This record, moreover, does not support the notion that economic obsolescence comes within the meaning of \u201ca reasonable allowanee for depreciation,\u201d as those terms are used in \u00a7 336(a)(2) of the Machinery Act.\nV.\nBecause of the errors committed by the Commission in connection with its approval of the use of imbedded cost of debt rather than market cost and inclusion in the income stream of investment tax credits, we conclude Colonial has overcome the presumption of correctness of the appraisals of the Department of Revenue. Colonial\u2019s burden was to show that the Department used either an arbitrary or an illegal method of valuation and that the Department\u2019s valuation substantially exceeded the fair market value of Colonial\u2019s system property. In re Southern Railway, 313 N.C. 117, 328 S.E. 2d 235. \u201cAn illegal appraisal method is one which will not result in a \u2018true value\u2019 as that term is used in \u00a7 283 and, for public service companies, in \u00a7 335.\u201d Id. at 181, 328 S.E. 2d at 239. The methods identified, as we have shown, will not result in true value; therefore, they are illegal.\nFurther, as we have demonstrated, had the Department used a market rate of return instead of Colonial\u2019s imbedded cost of debt, the Department\u2019s income indicator of value would have been $998,302,351, substantially less than its income indicator, using imbedded cost, of $1,186,941,543. Also, the Department\u2019s treatment of the investment tax credit had the effect of inflating the income stream of Colonial by some $12,282,800 in both the income approach and the stock and debt approach to value. Under the income approach this added some $115,025,000 to the Department\u2019s valuation even if the Department\u2019s erroneously low capitalization rate of 11.2% is used. It is not clear what effect the Department\u2019s inclusion of the investment tax credits in the income stream had on its ultimate valuation under the stock and debt approach.\nThe errors we have identified affect both the Department\u2019s income and stock and debt approach to value \u2014 two out of the three indicators used.\nWe are, therefore, satisfied that erroneous use of imbedded cost of debt and the erroneous inflation of the projected income stream of Colonial by inclusion of future investment tax credits caused the Department\u2019s valuations to be substantially higher than the fair market value of Colonial\u2019s system property. In re Southern Railway, 313 N.C. 177, 328 S.E. 2d 235.\nWe reverse the Court of Appeals insofar as it affirmed the Commission\u2019s use of imbedded cost of debt and inclusion of investment tax credits in the income stream. We affirm the Court of Appeals insofar as it approved the Commission\u2019s rejection of Colonial\u2019s reduction of FERC valuations by a factor attributable to \u201ceconomic obsolescence.\u201d We remand the case to the Court of Appeals with instructions that it remand to the North Carolina Property Tax Commission in order that the Commission may determine the system valuation of Colonial\u2019s property in a manner consistent with this opinion.\nReversed in part; affirmed in part; remanded.\n. Our decision in Southern Railway was rendered after the Commission\u2019s and the Court of Appeals\u2019 decision in the instant case.\n. Since all references to statutes herein are contained in subchapter II of chapter 105, we shall refer only to section numbers of the chapter.",
        "type": "majority",
        "author": "EXUM, Justice."
      }
    ],
    "attorneys": [
      "Lacy H. Thornburg, Attorney General, by Marilyn R. Mudge, Assistant Attorney General, for the state.",
      "Hunton & Williams, by Henry S. Manning, Jr., and William L. S. Rowe, for appellant Colonial Pipeline Company."
    ],
    "corrections": "",
    "head_matter": "IN THE MATTER OF: THE APPEAL OF COLONIAL PIPELINE, a public service company engaged in business in North Carolina, from the valuation of its property by the North Carolina Property Tax Commission for 1981\nNo. 225PA84\n(Filed 29 August 1986)\n1. Taxation \u00a7 25.7\u2014 gas pipeline system \u2014ad valorem taxes \u2014 market value \u2014use of imbedded, historical cost of debt improper\nThe Property Tax Commission erred in approving the Revenue Department\u2019s use of petitioner\u2019s imbedded, historical cost of debt rather than current market cost in arriving at a proper capitalization rate under the income approach to value, since the Revenue Department\u2019s appraiser sought to justify use of the imbedded cost of debt on the ground that the debt was assumable by a prospective purchaser, but petitioner\u2019s guaranteed debt could not be assumed by a purchaser, and since the record did not support the Property Tax Commission\u2019s weighting of the debt and capital components used in its calculation.\n2. Taxation \u00a7 25.7\u2014 gas pipeline system \u2014ad valorem taxes \u2014projected income stream \u2014 inclusion of investment tax credits improper\nThe Department of Revenue erred in including in petitioner\u2019s projected income stream a figure representing petitioner\u2019s average investment tax credits over the past five years, since petitioner would continue to have investment tax credits in the future equivalent to those it had enjoyed in the past only if it continued to invest in depreciable property at the same rate it had invested in the past and tax laws on the subject do not change, and there was no evidence to support the fact that there would be such credits in the future for petitioner.\n3. Taxation \u00a7 25.7\u2014 gas pipeline system \u2014ad valorem taxes \u2014 refusal to reduce property values for economic obsolescence \u2014 no error\nThe Property Tax Commission did not err in approving the Revenue Department\u2019s refusal to reduce FERC valuations of petitioner\u2019s system property under the cost approach to value because of \u201ceconomic obsolescence\u201d attributable to the below market rate of return allowed petitioner by the FERC, since deductions for \u201ceconomic obsolescence\u201d are matters of appraisal judgment about which reasonable appraisers could differ, and the Commission was not required to adopt one appraiser\u2019s view of the matter in the face of an equally plausible contrary opinion.\nOn Colonial Pipeline Company\u2019s petition for discretionary review of a decision of the Court of Appeals, 67 N.C. App. 388, 313 S.E. 2d 819 (1984), affirming an order of the North Carolina Property Tax Commission entered 4 November 1982.\nLacy H. Thornburg, Attorney General, by Marilyn R. Mudge, Assistant Attorney General, for the state.\nHunton & Williams, by Henry S. Manning, Jr., and William L. S. Rowe, for appellant Colonial Pipeline Company."
  },
  "file_name": "0224-01",
  "first_page_order": 248,
  "last_page_order": 261
}